A professional services firm's competence development

Industrial Marketing Management 36 (2007) 1068 – 1081

A professional services firm's competence development Gabriel Baffour Awuah ⁎,1 School of Business and Engineering Halmstad University P O Box 823 SE - 301 18 Halmstad, Sweden Received 8 February 2006; received in revised form 14 August 2006; accepted 26 August 2006 Available online 30 October 2006

Abstract The conceptualization of a firm's competence development has undergone some developments, as seen from the extant literature. However, studies or explanations of a firm's competence development over time seem to concentrate on firms that manufacture physical goods. The literature is devoid of studies on the competence development of professional services firms (PSFs). With two in-depth case studies, this paper seeks to shed light on factors that impinge on PSFs' competence development over time. An important finding of this study is that all the two PSFs' competence development over time has been influenced, in large measure, by their close and regular interaction with their respective immediate customers as well as with some significant third parties in their network of exchange relationships, where the actors mutually adapt to each other and also learn from each other. Evidences in all the two cases show that each of the firms has won and kept important customers that give them the most and frequent assignments per year, thanks to the factors that have affected their competence to meet customers' demand over time. © 2006 Elsevier Inc. All rights reserved. Keywords: Competence and competence development; PSFs; Network of exchange relationships

1. Introduction The competence of an individual person or of an organization is not a new phenomenon (Bandura, 1986; Dunphy, Turner, & Crawford, 1997; Kloftsen, 1992; Ulvund, 1985). However, our understanding of the concept of competence and, for that matter, how that is developed over time, at the individual level or at the organizational level, can differ from one researcher to another. In the marketing literature and the strategy literature, for example, researchers have over the years used all sorts of measures, such as competitive position, competitive advantage, market shares, profitability, core competences, competitive position, and customer loyalty to describe and/or explain a business firm's performance in the marketplace (Aaker, 2005; Bradley, 1995; Doyle, 1994, 2002; Kotler, 1997, 2001; Porter, 1985). For some, the firm's performance, the results of which can be any of the above measures, are mostly internal strategies, which a firm ⁎ Tel.: +46 35 16 7704. E-mail address: [email protected]. 1 He is a Senior Lecturer, School of Business and Engineering, Hamlstad University. He researches on internationalization processes of firms, competence development of organizations, and strategic alliances. His work has been published in International Business Review, Industrial Marketing Management, and Journal of Business and Industrial Marketing. 0019-8501/$ - see front matter © 2006 Elsevier Inc. All rights reserved. doi:10.1016/j.indmarman.2006.08.006

needs to develop and defend over time so as to be able to outperform its competitors (Hamel & Prahalad, 1990; Hollensen, 2001; Porter, 1985). To be able to effectively compete with rivals and outperform them, a firm will need to develop its core competence, for instance, by undertaking internal strategies that will facilitate that effort (Hamel & Prahalad, 1990). For some researchers, however, a firm's performance, no matter what measures are used, will depend, in large measure, on how well it handles its exchange relationships with other significant actors in the marketplace (Gummesson, 2002; Håkansson & Snehota, 1995). This position is a clear indication that a firm's internal efforts to develop its competence, for example, that will enable it meet demands put on it, might not be adequate. Taking a firm's customer, for example, the firm's strong relationship with the customer has been found to be very important in services companies (Berry & Parasuraman, 1991). This is because of their inherently interpersonal focus and the relative lack of objective measures for evaluating service quality. Forging important exchange relationships cannot be limited to a firm's customers alone. As maintained elsewhere (Doyle, 2002; Gummesson, 2002; Tzokas & Saren, 2004), a firm's close exchange relationships with some important actors in the focused firm's value chain, do help to provide the end product (i.e. the service solution) that will be as good as possible (Doyle,

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2002) for the end customer. Looking at a firm's competence and how that is developed over time, studies or explanations to that effect seem to concentrate on firms that manufacture physical goods (Awuah, 2001; Hamel & Prahalad, 1990; Johnston, Wilkinson, & Ritter, 2002; Prahalad & Ramaswamy, 2000). In view of the above, the purpose of this study is to systematically describe and analyze the factors that impact on a services firm's competence development over time, thereby also contributing to theory development in the subject area. The main research question is as follows: How does a services firm's network of exchange relationships affect the development of its competence over time? The rest of the paper will proceed as follows. In the next section we discuss the concepts of competence and learning at the organizational level, followed by a literature review and our theoretical framework(s). The method employed for the data collection follows the theoretical framework(s). This section is then followed by a presentation and analysis of the case studies. Finally, the last section will consist of conclusion and the implication(s) of the study.

& Badger, 2000). This competence development is often enhanced by the mutual learning and experiences the firm engages in through its interaction with other actors in a network context (Awuah, 2001; Fruin, 2001; Snehota, 1990). In the final analysis, a marketer's ultimate goal will be to seek an answer to the question of how its customers' needs and wants can be satisfied (Doyle, 2002). For some researchers (Armstrong, Saunders, & Wong, 2002; Armstrong, Saunders, & Wong, 2005; Doyle, 2002), the answer to this question is the same for both services and products. While the definition of competence adopted for the present study has much in common with some of the definitions above (Bjerkens et al., 1990; Johnston et al., 2002; Kloftsen, 1992; Webster, 1991), because it is the customer need satisfaction that is in focus, we cast a wider net to see the extent to which a firm's network of exchange relationships impinges on the firm's competence development (see also Johnston et al., 2002, p. 119). For Prahalad and Ramaswamy (2000, p. 80; Awuah, 2001), a firm's competence is a function of the collective knowledge available to a whole system, an enhanced network of traditional suppliers, manufacturers, partners, investors and customers.

2. The concepts of competence and learning

2.2. Learning

2.1. Competence

The concept of learning and its importance for competence development is emphasized in the literature (Dunphy et al., 1997; Hamel & Prahalad, 1990; Prahalad & Ramswamy, 2000, p. 81). Organizations learn (Andersson, Forsgren, & Holm, 2002; Dodgson, 1993; Dunphy et al., 1997), alone or in interaction with other actors, in order to improve upon its performance. Dunphy et al. (1997), for example, maintain that organizations are concerned with learning if it helps them to perform better. And, for Dunphy et al., learning which is valuable to organizations is embodied in competencies to do things better or do different things. In this study, a firm's internal capability to learn so as to perform better (using whatever measure to describe that performance, for e.g., competence, competitiveness or innovativeness) is complemented by its capability to engage in mutual learning with some actors, with whom the firm interacts. As stated elsewhere (Andersson et al., 2002, p. 981; Ford et al., 1986; Havila, Håkansson, & Pederson, 1999; Tzokas & Saren, 2004), the interdependent relationships between most firms suggest that a firm and its interacting partners engage in mutual learning. Interacting parties mutually take measures to improve the uses of their interrelated activities and, hence, their respective performances. With this, we now review the existing literature.

Studying a concept such as competence is very complex, since the meaning of the concept can be used differently by many people. “The ability of a firm to develop and manage relations with key suppliers, customers and other organizations and to deal effectively with the interactions among these relations is a core competence of a firm” (Johnston et al., 2002, p.119). “In this paper, the term competence is used to mean not only having knowledge or possessing skills and qualifications, but also using those qualifications” (Ritter & Gemünde, 2004, p. 549). “Core competencies are the collective learning in the organization, especially how to coordinate diverse skills and integrate multiple streams of technologies” (Hamel & Prahalad, 1990, p.82). For Hamel and Prahalad, competence is the glue that binds existing businesses. Others refer to a firm's competence as its ability to act with effectiveness and efficiency when it comes to the call to satisfy customer needs and wishes (Bjerkens, Dahlbohm, & Mathiassen, 1990; Kloftsen, 1992). Kloftsen (1992, p. 30), for example, contends that a firm's competence lies in its ability to identify and satisfy the needs and wishes of customers and to conduct gainful transactions with them. For Webster (1991), emphasis should be put on a firm's distinctive competence. This allows a firm to focus attention on the customers served, the nature of the needs that are satisfied and the role of the firm's products or services that are offered in satisfying that sets of needs. As Doyle (2002) posits, a firm's competence lies in its use of suppliers and subcontractors to facilitate customer needs' satisfaction. In this study, we adopt Awuah's (1997, 2001) definition of a firm's competence. According to Awuah, a firm's competence is its ability to meet demands put on it by the actors with whom it interacts, where that competence is developed as the result of linking together its internal skills, activities, and resources to those of external actors (Snehota, 1990, p. 203; Sadler-Smith, Chaston,

3. Literature review Studies of a firm's competence and how that is developed over time, after the influential contribution of Hamel and Prahalad (1990), have all concentrated on some internal strategies, which the firm is supposed to undertake to develop its competence. Since most studies consider a firm's competence to lie in its personnel's collective knowledge, skills, qualification and also their knowledge in the existing technologies and processes to perform activities that will enable the firm to outperform its competitors (Abell & Hammond, 1979; Hamel & Prahalad, 1990,

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1996; Kotler, 1997), constantly educating the staff and upgrading other existing resources are a major means to develop competence. The sources (e.g. collective knowledge and skills in the firm) of a firm's core competence (Hamel & Prahalad, 1990, 1996), leading to diversifying a firm's activities into various markets and provide value that customers would appreciate and need, must be protected; it should be difficult for competitors to copy. The personnel as well as business units are supposed to learn from each other, collective learning. These efforts seem to be undertaken only within the firm. The above view, as many researchers see it, lacks the complete picture of sources of a firm's competence and how that is developed over time. Hence, it is suggested that we complement the existing knowledge by emphasizing that a firm's network of exchange relationships can be an important source of its competence, which can also affect the development of that competence (Andersson et al., 2002; Davies & Brush, 1997; Johnston et al., 2002; Prahalad & Ramaswamy, 2000; Ritter & Gemünde, 2003). In the network literature Andersson et al. (2002) shed light on the extent to which a subsidiary, a manufacturing firm, within a multinational corporation develops and shares competence in product and production development with other sister companies. The study provided by Johnston et al. (2002), on a more aggregated level, sheds light on the fact that a firm's network competence impinges on its degree of technological interweavement and its innovation success. The focus of this study too was not on the extent to which a firm in a network meets demands put on it by some other actors, especially customers. Awuah's studies (1997, 2001) have made a contribution here, but his studies concentrated on manufacturing firms. In this study, we aim to describe factors that impact on a professional services firm's (PSF, see Appendix B) competence development over time, something which is lacking in the existing literature. Like Awuah's studies, we also focus on the industrial marketing sector, but with professional services firms as our focus of study and analysis. A PSF's relationship to its customers, suppliers and other parties are ‘connected’ in the sense that what is happening in one relationship affects the interaction in others (Håkansson & Snehota, 1995, p. 12). In this study, therefore, how a supplying services firm's competence in meeting customers' demand is developed cannot be decoupled from its network context. Restricting the study to professional firms and how they meet demands customers put on them has to do with the above reasons. Also the delimitation by focusing on focal actors, services supplying firms and their respective customers, is arbitrary; it is just for analytical purposes (see also Johanson, 1989; Axelsson, 1996a,b, p.224). The impact of the focal actors' exchange relationships with third parties are channeled through the focal actors (Andersson, Håkansson, & Johanson 1994; Anderson & Narus, 2004; Håkansson & Snehota, 1995). The performance of a firm, manifested, for example, in its market share, profitability, sales growth and customer need satisfaction, will depend upon a number of factors (Doyle & Wong, 1998; Edvardsson & Larsson, 2004; Håkansson & Snehota, 1995; Hamel & Prahalad, 1990; Prahalad & Ramaswamy, 2000). Some of the factors are the marketing orientation philosophy used by a firm (Doyle & Wong, 1998; Jaworski & Kohli, 1990; Narver

& Slater, 1993), the competence a firm develops (Hamel & Prahalad, 1990; Johnston et al., 2002), and the services concept (Berry & Parasuraman, 1991; Edvardsson & Larsson, 2004) a firm adopts. These are, for example, areas of interests that have generated a lot of research. Many studies in the area of market orientation build on Jaworski and Kohli's (1990) view of the extent to which market orientation affects a firm's performance. Essential for market orientation will be the organization-wide collection and dissemination of information about current and future customer needs and how the entire organization responds to the information. It is beyond the scope of the present study to discuss the relationship between market orientation and business performance as studied elsewhere (Doyle & Wong, 1998; Dadzie & Winston, 2002; Jaworski & Kohli, 1990) and the extent to which a firm's services concept affects its performance. The on-going research on a firm's competence and how that is developed over time, as reviewed above, is of special interest for our purpose. The next section deals with our theoretical framework(s). 4. Theoretical framework(s) 4.1. The industrial network approach The conceptual model in this study builds heavily on the industrial network approach (for details see Axelsson, 1996a,b; Håkansson, 1982, 1987, 1989; Håkansson & Snehota, 1995; Hammarkvist, Håkansson, & Mattsson, 1982; Hägg & Johanson, 1982). The network approach suggests that specific actors such as firms, organizations and individuals, possess specific resources and perform specific activities which create exchange relationships among them (Hägg & Johanson, 1982; Håkansson, 1982; Håkansson & Snehota, 1995). This implies that the activities of one actor are, for the most part, dependent on the outcome of those of certain others. Hence a firm's competence and its development over time will affect and be affected by specific actors with whom it interacts in a network context (Fruin, 2001; Johnston et al., 2002; Ritter & Gemünde, 2004). As the actors in interaction complement each other, through the uses of their respective resources and activities, they become interdependent, especially when the interaction becomes much more frequent and is mutually meaningful to the parties (Gummesson, 2002; Håkansson, 1982). An important effect of the actors' interdependence is that they engage in mutual learning (Ford, Håkansson, & Johanson, 1986; Havila et al., 1999) and mutual adaptations (Ford, 1997; Hägg & Johanson, 1982; Håkansson, 1987). As actors adapt their products/services, attitudes, and routines in order to meet some demands put on them by their counterparts, commitments and trust in their relationship increase (Hunt & Morgan, 1994; Håkansson, 1982); the adaptations will also strengthen the bonds, knowledge, technical, commercial, social and administrative, between themselves. Interconnectedness of exchange relationships (Cook & Emersson, 1978) between interdependent actors in our industrial system has been found. Thus, an actor's relationships with its focal partners, for instance, are contingent, positively or negatively, upon exchange in other relations. However, actors tend to develop their specific positions relative to others in a network (Johanson & Mattsson, 1985). A

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firm's position in a network gives it direct control over its own resources and activities and indirect control over those of others. All this will facilitate an actor's access to activities and resources that will help it meet demands, its competence, put on it by other actors. In this study a modified model (see below) of the industrial network approach, a general one, developed by Awuah (1994, 1997, pp.78–79) has proved to be very useful. The modified model has been developed inductively by eliciting insights from the interplay between, for example, the industrial network model and various empirical data (Awuah, 1997, 2001). Awuah's model, our analytical tool, was developed for the purposes of studying the extent to which an organization (including manufacturing and services firms) utilizes its network of exchange relationships in accomplishing (Ford, 1997; Håkansson, 1987) any task in the industrial field. Hence, the special characteristics of services are incorporated in the model discussion. In Fig. 1, a firm's competence development is seen to be affected by three interrelated variables, as the firm interacts with other actors. The three basic factors are (a) the transfer of elements of exchange, namely product/service, information, financial and social exchange, between interacting parties, (b) the mutual learning undertaken by the parties and (c) the mutual adaptations the parties undertake. As a relational process, the interplay between the above factors evolves over time. As one actor's product/service becomes an input for another actor, for instance, the activation and integration (Anderson & Narus, 2004; Håkansson, 1987) of their interdependent resources or activities cannot be done without engaging in effective financial, information and social exchange (i.e. the elements of exchange). The relationship between the elements of exchange results in a number of benefits for the interacting parties. Through the regular and effective transfer of such elements of exchange to and from a counterpart, an actor's knowledge about the characteristics and expectations of its counterpart(s) will be enhanced. Moreover, the interacting parties will learn about how to utilize each other's capabilities. With services' characteristics (Berry & Parasuraman, 1991; Normann, 1991) such as intangibility (e.g. can't be seen, felt, tasted and smelled), variability (e.g. quality of service depends on who provides it at a certain time),

Fig. 1. Competence development through a network of exchange relationships Source: Awuah, 1997, p. 78.

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perishability (can't be stored) and inseparability (production and consumption at the same time), the simultaneous presence of a seller and a buyer of a certain service, for example, will not only be crucial, a relationship will also have to emerge (Gummesson, 1987; 2002; Ford, 1990; Grönroos, 1990; Mercer, 1993). For Normann (1991), a direct contact between the seller and the buyer might then be necessary, since production and consumption might take place at the same time. All this will facilitate the transfer of the elements of exchange between actors in interaction. The importance of social relationship is recognized in the network literature (Ford, 1997; Gummesson, 2002; Håkansson, 1982). On the one hand, it helps to increase the interacting actors' knowledge of each other. On the other hand, it also contributes greatly to the cooperation, understanding and trust (Hunt & Morgan, 1994), which strengthen the various bonds (cf. Hammarkvist et al., 1982; Hägg & Johanson, 1982; Pfeffer & Salancik, 1978) between the firms for which they work. Actors in interaction may have their respective interests; they engage in exchange to promote these interests (Burt, 1982). It is not uncommon to have a simultaneous presence of common and conflicting interests (Håkansson, 1987) in any exchange relationships; hence the exercise of power by an actor in a relationship is not uncommon. But, in exchange relationships where the interacting parties feel that they are mutually dependent and are also willing to invest much in relationship-specific transactions, when need be, any abuse of power will endanger stability and long-term relationships. The process of interaction denotes learning (Ford et al., 1986; Havila et al., 1999). Principally, interacting parties strive after knowledge (Tzokas & Saren, 2004) that helps them to take advantage of opportunities or overcome constraints that might inhibit their mutual exchange. Since the activities of actors in interaction are interconnected (Cook & Emersson, 1978; Holmlund, 2004), any actor's inability to meet its end customers' demands will have a profound effect on the others with whom it interacts, especially, its immediate trade partners. As the results of the interdependent relationships between most firms, interacting parties do engage in mutual learning; for the ability to meet demands of others is often beyond the knowledge, skills and/or resources of a single firm (Awuah, 2001; Fruin, 2001; Tzokas & Saren, 2004). For Dunphy et al. (1997), the market-based organizational learning and the internally focused learning reinforce each other. Evidently, characteristics of interacting actors, actors' expectations, the combination and uses of heterogeneous resources, actions of the actors and so on may not be constant over time. They change, and so do the knowledge of the actors. Changes in the network, in whatever form they occur, may demand that the interacting actors make mutual adaptations to meet each other's needs. Adaptation, in turn, will influence the actors' learning rate. One adapts to a counterpart or a situation which will demand mutual action from interacting parties. Changes or adaptations to meet the demands of a counterpart and the results thereof will be a basis for future references in decision making. As an actor adapts to match the needs or capabilities of other actors, the former and the latter may become increasingly dependent on each other (Hägg & Johanson, 1982; Håkansson & Snehota, 1995; Turnbull & Brennan, 1999). All this suggests that exchange relationships between certain actors have a history (Snehota, 1990).

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The interplay between the three basic factors discussed above shows that as a firm's competence to meet its obligations increases through time, its exchange relationships, characterized by the transfer of elements of exchange, learning and adaptations, with some significant actors will be positively affected (see Fig. 1). This model therefore serves as our analytical tool for the present study. Now, we dwell on the method used in this study. 5. Methodology Since no effort is striven after to generalize the findings of this study and/or to present an objective view of a services firm's competence and how that is affected by its position within a network of exchange relationships, a positivistic approach, mostly prescribing quantitative methods (Hyde, 2000; Bryman, 1989; Ghauri & Gronhaug, 2002) was not chosen. Instead, a non-positivistic approach, which will enable us to deeply understand the complex nature of exchange relationships, how these evolve over time and their effects, when studying an underresearched area, such as the present study, case study method was found to be appropriate (Yin, 1989, 1994; Bryman, 1989; Ghauri & Gronhaug, 2002; Gummesson, 2003) and used as the result. Once the decision to use the case study method for the data collection was made, the firms included in this study were identified and drawn from their respective Web pages. We were looking for services firms that deliver no tangible products but intangible ones. This criterion and the following definition of a services firm helped us to select the firms we have in our sample. “A service is any activity or benefit that one party can offer to another which is essentially intangible and does not result in the ownership of anything” (Armstrong et al., 2002, p. 535). As the study focuses on professional services firms, we were also looking for services firms that rely on highly professional staff, people-based services (Armsrtong et al., 2002; see also Appendix B for some characteristics of PSFs), and information intensive ones (McCole & Ramsey, 2005, p. 38). All firms in this study fitted well into our criteria. Also some assertions made in the literature that (1) a firm's network of exchange relationships can be an important source of its competence, which can affect the development of that competence (Johnston et al., 2002; Prahalad & Ramaswamy, 2000; Ritter & Gemünde, 2003) and (2) that a firm's competence is a function of the collective knowledge available to a whole system — an enhanced network of traditional suppliers, manufacturers, partners, investors and customers (Prahalad & Ramaswamy, 2000, p. 80) motivated us to undertake the present study. This is because there is virtually no study that has addressed the extent to which a PSF's competence is affected by its network of exchange relationships. After identifying the firms, the two in this study and several others, we wrote to solicit for their participation in our research, asking for their acceptance and whom to approach for personal interviews at some appointed date. By this approach, we were directed to arrange and hold interview (s) with some key informant or respondent, who was judged to be knowledgeable in his/her firm's exchange relationships with some significant actors in their network of exchange relationships. The two firms in this study are (1) HSTD, Halmstad, an advertising firm and (2)

Albihns AB, a legal firm. Table A1 presents the sample characteristics of firms in this study (see Appendix A; Table A1). The interviews were held with the various respondents at their respective offices in September, 2005. Tape-recorded interviews and some written notes taken, during the interviews, have been kept, an attempt that speaks for the reliability and validity of the report (Turnbull & Brennan, 1999). The average time for an interview was 2 h. This contributed immensely to the congenial atmosphere that prevailed, while the interviewer and the interviewee ran through the loosely structured interview guide; there was ample time to explain or correct misunderstandings. In December 2005, all respondents were sent draft copies of the interviews held with them for comments, asking them to subtract and/or add additional information, as they deemed appropriate. The aim was to secure the validity and genuineness of the study (Bryman, 1989; Kidder & Judd, 1986). One of the respondents did send in her feedback, with the necessary adjustments made. The other respondent did not send in any feedback. However, we assumed that the respondent that did not send in any feedback might have been content with the report, for respondents normally react to information that does not reflect what they gave at an interview (Awuah, 1994). In the next section we present the two cases. 6. The case of Halmstad Reklambyrå (HSTD) Most of HSTD's services (see Appendix A, Table A1 for its basic characteristics) are sold to non-business and business organizations. HSTD principally provides advertising services, which in turn are broken into three main areas: (1) Printing (e.g. materials, brochures and graphical designs — packaging designs, graphic profiles and logotypes), (2) Internet Services (e.g. production of Web sites, portals and advertising) and (3) Sending messages and pictures via film or radio. HSTD, in the provision of the above services, is basically selling ideas, advice and design of pictures and messages. 7. Interaction processes. The transfer of elements of exchanges between the interacting parties 7.1. Product/service exchange HSTD is a pure service provider, with a very high customer contact. This high customer contact enables HSTD to provide customized solutions to the various customers (e.g. Erostop, Hallandsposten, Etac, Energieverken in Halmstad, Kraft, Landstinget Halland and Riskbyggen, all big firms). Any assignment from a customer will bring about a close and continuous interaction between the parties. Experts from HSTD, mostly the managing director/project leader, and the two other co-owners, art directors, will meet customers very regularly to discuss the latter's needs and their market situation. With this knowledge about the customer, HSTD then will provide reliable services to the various customers, each depending upon the unique situation confronting it. Mostly, customers will buy a whole package of services for an advertising campaign. Thus, HSTD will be responsible for the ideas, text, pictures and the entire production. Thus, on behalf of

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the customer, HSTD contacts the media in order to publish in various newspapers, professional newspapers, radio or direct mails, and materials for trade fares. A customer that does not want a whole package of services can just buy HSTD's advice, ideas, design or suggestion of pictures and can get their own media or printing press (with HSTD's advice also) to help them. The most important customers, for HSTD, are those that buy services amounting to about 500,000 Swedish kronor per year. They buy continuously, co-operate very well and are trustful; and many of them have been with HSTD since 1995/6 (the two firms brought their customers with them after the merger). The average age of the relationships between HSTD's and its customers is 6 years. For HSTD, an important customer is a security for the firm's revenue. Most of them even have written and long-term contracts with HSTD, mostly three years in a stretch, but HSTD gets orders on the year's basis. However, other important customers have verbal contracts, no written ones, with HSTD. For most customers, delivery of services can be daily, even hourly, and so on. 7.2. Information exchange According to HSTD, the production and consumption of most of the services are inseparable so close and continuous contacts (i.e. both non-personal and personal means of contacts) are very crucial for the parties to meet each other's needs. Through the close meetings, experts from HSTD and those from the customer organizations (esp. the big ones have own expertise in-house), work together, propose and suggest ideas, do some sketches of designs, for example, and get immediate feedback from the counterpart. Here, the process allows HSTD to know the customer (s) best, their problems and interests. The same can be said about customer's knowledge of HSTD's capabilities, and above all their willingness to co-operate and to learn from each other. To exemplify the joint discussion, the parties can discuss and agree on the intended budget, sketching of the project by HSTD (the seller) and the customer has to accept or reject or modify those things. That done, the art directors (at HSTD) will oversee the photographing work, the copywriter will conduct interviews with people, for which the project is made, and the project leader will oversee that the schedule time and the budget for the entire project are followed. These preparations will have to be accepted and signed by the customer, before HSTD can produce the services for the customer. 7.3. Financial exchange Customers' payment of services on time, just like the delivery of services to them on time, is very important for HSTD. All customers enjoy 30 days credit period, after the purchase of a service. For most customers, price-value combination, when buying services, is very crucial. Small firms or organizations, with no expertise in-house, tend to be price-sensitive. They will always compare HSTD prices to those of its competitors. The usual question HSTD gets from some customers is as follows. “What can I get from HSTD, but not from the competitors?” Buyers that are not used to buy HSTD's services will be a little doubtful, at the beginning, as to what they are buying. HSTD will invite such

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customers to their premises and show them how HSTD's production and other activities are carried on. Through this, most become convinced and accept the prices charged by HSTD for some services. Very important customers that buy about 500,000 Swedish kronor services yearly are not price-sensitive. These, especially those having contracts with HSTD, which is a guarantee for assignments, can even enjoy discounts between 3– 10%. The longer the relationship between a customer and HSTD, the more the parties stress value-added solution instead of price. Hence, financial exchange between the parties is very crucial. 7.4. Social exchange Many of HSTD personnel have forged personal friendships with some representatives of their customer firms because they have been doing business with each other for a long time. Some do socialize, after work, with friends at customer firms; going for lunch together is a common socializing aspect. For the respondent at HSTD, such socialization helps them to build more personal knowledge of each other, something they hope might strengthen the confidence and the trust they have in doing business with each other also. 8. The learning and adaptation inherent in interaction 8.1. The Learning process HSTD has some customers that have difficulty in knowing what they really want; lack of knowledge is very high among some customers, small firms or organizations. As the parties engage in dialogue and discussions about customers’ needs, market situations, and trends in the environment, they mutually learn and jointly agree on measures to be taken in order to satisfy the needs of the customer. According to the respondent, big customer firms do have competences in almost all areas, but they may lack one essential thing, “creativity”. For example, creating pictures and messages that are appealing to some target groups make the big firms prefer to do business with HSTD. For HSTD, the interaction with the big firms has been very useful in that knowledge acquired during the process is often modified and transferred to help many small firms, which lack expertise in many areas. Some customer assignments have demanded that HSTD will have to acquire special knowledge, where they engage the services of independent experts to help them upgrade their knowledge in some functional areas, example, power point presentations and the use of some computer soft wares to design and produce graphics. 8.2. The adaptation process The close and regular interaction between HSTD and its customers has one advantage that mistakes in projects do not take long time to be detected by the parties. Any mistake detected too late can have severe financial consequences. This is because HSTD might have already bought and used some services from its numerous suppliers; so pointing out a mistake so late would demand that the project would have to, more or

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less, be started all over again. Hence, HSTD and its customers try to voice any mistake out, as the customers help produce and consume the services at the same time. However, some customers may not have the time to read through some messages and/or graphic designs and give the feedback on time. This can lead to some accumulated mistakes. It becomes expensive to rectify such mistakes, but HSTD will always adjust to the customers and help solve the problem. Sometimes two customers will want some services to be delivered at the same time. Thus, HSTD cannot tell one customer to wait, while it does the assignment for the other. Both might be in dire need of some services, which will demand that HSTD will have to cater to both customers' need at the same time. HSTD adapts to the situation by letting its personnel work overtime so that they can help both customers. For customers, some adaptations can be in their routines and attitude. HSTD, through discussions and demonstrations, can get some customers, with some specified needs and wants, to think about alternative solutions because that is what HSTD thinks is efficient and cost effective. A case in point is a small firm that wanted to introduce customer cards. HSTD did help the firm to do a third alternative. The firm did as advised by HSTD and the former was very satisfied. As HSTD acquires new knowledge (e.g. computer software use in graphics/design), their customers do adapt to the new solutions offered by HSTD. 9. Interacting with third parties For HSTD to be able to understand and appreciate the demands its customers' customers make, HSTD has the practice of evaluating or following up the effect of some assignments done for a customer. To do this, HSTD will go to some customers' customers to hold interviews with them. For example, they can evaluate the effect of some advertisement done for a customer by talking to customers' customers. Most of the time, an independent research firm will be hired by HSTD to do the market research, contacting customers' customers. To better understand the demands of its customers, HSTD sometimes invites some focused groups comprising its customers' customers to find out from them what their needs and preferences are. This enables HSTD understand why their customers make some demands and how HSTD can help them. Concretely, Etac (customer to HSTD)'s customers, which are mostly handicapped people, are visited by HSTD. The knowledge acquired here enables HSTD to offer Etac messages and pictures that are tailor-made for the handicapped people. Satisfying the needs and wants of its customers, HSTD also interacts with a number of suppliers, which complement the former's resources and activities. Running advertising campaign for a customer, HSTD contracts the services of suppliers such as printing press firms, photographing firms, Translation firms, Mass Media (professional and non-professional newspapers, radio and television firms), Movie firms, and copywriters. These independent firms are contracted by HSTD to assist in providing a total solution that helps meet HSTD's customers' needs. For HSTD, it is important that each and every one of their suppliers maintains consistency and reliability in

providing good quality job; the coordination and integration of the heterogeneous services will demand HSTD's close and regular interaction with all the suppliers. All this have enabled HSTD to win and retain its present customers. As a knowledge-intensive company, HSTD keeps abreast with new knowledge. Taking part in relevant seminars, lectures at universities and other conferences, participating in trade fares, reading relevant literature and studying various Web sites bring them into contacts, directly or indirectly, with many other actors. Some experts are, periodically, invited to HSTD to have seminars and run courses for the personnel. HSTD is an active member in the “Sveriges Reklamförbund”, (Advertisers Union in Sweden) and also a member in the 4th October Movement, an influencer group, which undertakes lobby activities on behalf of its members. It is important for HSTD to be a member of such unions because a single firm, and most especially a small firm like HSTD, would not be able to influence laws and regulations that might be unfavourable for the conduct of business in their common industry. 10. The case of Albhin Albihns (see Appendix A; Table A1 for its basic characteristics) operates mostly in the business-to-business market, offering customized solutions to most customers. A customized solution for a customer will consist of a legal protection for a customer's patent, trademark, design, copyrights, domain names and giving advice on competition regulations and commercial law to a customer in a particular market. Hence, regular interaction with each customer assumes importance. 11. Interaction processes: the transfer of elements of exchange between interacting parties 11.1. Product/service exchange Albhins is a pure and people-base service provider, with a very high-customer contact. “We live on our knowledge, which is inside our brains”. Large customers do have patent departments (protection of patent is a core service offered by Albhins) in-house, yet they turn to Albhins for help in filing applications and protecting applications that have been approved. This is because customers may not have the time and the timely knowledge that will enable them to address certain problems. For small customer firms, with no in-house patent department, helping them takes much time and other resources. Mostly, Albhins' customers tend to buy a whole package of services, namely applying for and the protection of patent, the protection of a company's design, trademark, brand and domain name. As part of the package, a customer, operating in a foreign market, needs Albhins' help regarding how to, for example, legally understand and/interpret laws and regulations that affect the conduct of business in a particular market. Buying a whole package of services from a local branch (e.g. at Gothenburg), the branch may not have all the specialists inhouse to help the customer. But, they can draw on other specialists at Albhins in other branches (see Appendix A) to come down to help serve the customer. To be able to provide the

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right services to a customer, Albhins and the customer will need to collaborate closely with each other. For the protection of a customer's patent, for example, the customer will be offered a personal professional assistance from an expert in Albhins. The expert, a generalist, will be sent to the customer to study and assess the latter's need. Albhins will then set up a team comprising different specialists (the firm has about 100 of them) that are judged to be competent and appropriate for the assignment at hand. These experts from Albhins will have regular and close discussions with their counterparts at the customer firm in order to be able to, among other things, jointly analyze and think out solutions to the customer's needs. Due to the intense competition in the seller's market certain customers opt for standardized solutions, some common procedure to apply for a patent right. In this case, they ask several selling firms to provide samples for study, evaluation and selection. Eventually, they choose the service provider that can best satisfy their needs. But, for customers buying a whole package of services and unique solutions, long term-solutions are the essential issue for them. Big or important customers such as Volvo, SCA, and Ericsson, which have had more than 30 years business relationships with Albhins, opt for customized solutions, for their specific needs might differ from others as they operate in Sweden, South Korea, Britain, Poland, U.S.A and the Middle Ease, for example. Important customers give large assignments per year and have also frequent exchanges with Albhins. Still with the example of patent applications, on behalf of a customer, to be sent to some authorities (e.g. Swedish Patent Registration Office) certain requirements must be met. Thus, the attorney (s) helping the customer must not only have knowledge in areas that are patentable, he/she must also be a qualified lawyer and an engineer in some field. All in all, an application for a patent will require the following: (1) a comprehensive description of the idea, concept or product, for which patent is being sought, it should be new, unique and useful for industrial application, (2) indicate precisely the requirements for patent, (3) correct translation of the application into English, and (4) proper editing to eliminate typing errors. This brings about extensive information exchange between the parties. Together, the customer and Albhins mutually do the customer need analysis thoroughly before they can jointly agree on what each party has to do for the fulfillment of the application requirements.

customer reads the application, gives some feedback, before the entire application is submitted to some Patent Registration Authorities for approval. For Albhins, customers are also coproducers. This helps to avoid the accumulation of wrong doing on the part of the seller and vice versa.

11.2. Information exchange

12. The learning and adaptation inherent in interaction

As the procedure to file an application for a patent right and to protect that over time, for example, indicate, comprehensive and extensive information input from the parties will be needed. After the parties have discussed an idea or a product that is deemed patentable, meeting the above requirements, Albhins will, in turn, check with some Patent Registration Office to find out whether there are changes in the requirements or not and will get back to the customer with that information too. When all the necessary information has been gathered, Albhins will then write the application for a patent protection, with all the necessary requirements met. The

12.1. Learning

11.3. Financial exchange For Albhins, knowledge and information acquisition, from within and from external sources, their process and transformation into problem solving solution for a customer, make the financial exchange between Albhins and its customers very important. Much of Albhins' business is done with the important or big customers; almost all of them need Albhins' services in Sweden and in foreign markets. These big firms give regular and large assignments to Albhins, for which payments are made regularly. For the last 10 years, Albhins has been having long-term contracts with some of them. The contract is seen as a guarantee of assignments per year; the contract is renewed every third year. While the big firms buy a whole package of services and place emphasis on value-added solutions, not price, most small firms may opt for simple solutions (not a whole package) where price of the services they buy play a major role. Albhins has to cater for these different needs. Firms that buy many services, regularly and in large volumes, do get some discounts (3–10%). All customers enjoy a 30 day credit period, after a purchase of services, to pay for Albhins' services. But, the customers, in whom Albhins has not much trust, advanced payment will have to be made before some services are delivered to them. 11.4. Social exchange According to the informant, Albhins encourages its personnel to have social interaction with their customers. Social relationship is seen as part of the need to take care of customers. During such interaction, according to the informant, it may not even be necessary to discuss business at all, but just to get to know each other better. At times some personnel at Albhins go to watch hockey matches or go to some pubs with some personnel from some customer firms (e.g. Volvo and Ericsson). Some effect of the social exchange, as maintained by the informant, will be to easily have contact with each other later on.

When Albhins and customers engage in need analysis, for example, they learn about each other's capabilities. Buying tailor-made services that are intangible, customers may want to have some evidences that will bring to the fore what the customer really need and what the seller can or cannot do for the buyer, all judging from the circumstances facing the parties. Usually Albhins organizes internal courses for its personnel, where external experts from universities and consulting firms (from Sweden and foreign markets) come to Albhins to give

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lectures on a number of issues, such as American laws and doing business in that country. Personnel from Alhbins and some personnel from customer firms do participate in such educational activities. Interaction with most small firms demands much time and explanations, since such firms may lack expertise in patent issues, for example. Engaging such firms in regular and close interaction, where the parties inform and be informed about market developments, changes in regulations and whatever, most small firms get to know, in the course of time, what their needs are and how the seller can help meet that. 12.2. Adaptation The exchange relationships between Albhins and some of the important customers have lasted more than over 30 years. It was only 10 years ago that most of them started to have written contracts with Albhins. In the course of time, the parties have mutually agreed and adapted to this new routine (having a written contract) because it is a guarantee for the constant and regular exchanges of services, information, and finances between the parties. One area where Albhins has adapted to some customers has to do with the translation of patent applications into English. Some price-sensitive customers will want the cheapest means of translation, which the computer translation mechanism allows. Here, Albhins has invested in educating its personnel to muster the software that allows the computer-aided translation. Hence, those looking for some computer-aided translation, not so advanced as the personal and thorough translation, do get help from Albhins. With tangible reasons from Albhins, customers accept late deliveries of services. When a buyer complaints about a poor performance of an expert at Albhins and insists that he/she should be replaced, Albhins does that. However, a few customers that have not had long-term relationship with Albhins will neither complain about a poor performance experienced nor do a repeat purchase. It does not take much time for Albhins to discover this defection, so they call such customers to ask about their attitude and purchase behaviour. The answer Albhins will get from such customers is as follows: “We have changed the supplier”. With this negative development, Albhins is seriously stressing the importance of customer care. Customers that may have the difficulty to pay for the services, at some agreed upon time period, will discuss their problem with Albhins. Together, the parties will make payment plans, after which the customer will pay accordingly. Administratively, Albhins and almost all its customers have adapted to each other in the collection of some information via the Internet. Through Albhins' Albnet, a portal in the net, customers can obtain data on the supplier. Mutually, the supplier can also log in into most of the customers' website and go into their portals for information that concerns them. With time most small firms buy a whole package of services, a change of attitude. 13. Interacting with third parties Representing customers in different foreign markets (e.g. US and Japan) Albhins, which cannot be in all places at the same time, uses the services of local attorneys that know, for instance,

their countries' laws and regulations, and business cultures. With its intensive interaction with independent attorneys in different markets, Albhins is in regular touch with timely and up-to-date information that help the parties to mutually learning about the needs of Albhins and that of Albhins' customers. In most cases Albhins will travel to a foreign market such as the US to first study the country, with its customer's need in mind, the competitive situation, the segment (s) targeted by the customer, and conduct interviews with several actors (e.g. subattorneys and market research firms in the US). With the inputs from the external actors, Albhins will be in the position to come back to help customers that will want to have something to do in the US market. The same can be said about representing customers in some other countries. Interacting with institutions such as the Swedish Patent Registration Office and the European Patent Convention helps Albhins gain knowledge pertaining to laws and regulations on patent, for example, and how they change over time. As a knowledge-intensive firm, interaction with universities such as the Stockholm School of Economics and the Chalmers Technical University is going on constantly. Through such interaction with these places of learning, Albhins gains up-to-date knowledge in their areas of specialization, knowledge that it transfers to help customers meet their needs. Albhins publishes and sends information, to which customers have access, through the firm's monthly magazine and brochures. Albhins' interaction with a number of suppliers that supply some physical products such as communication equipment (for seminars and lectures), papers, and firms supplying information technology services and advertising services (advertising in various media) is very important. Albhin's active membership in some industry associations is very important because, together, the members can directly or indirectly influence government policies and/or regulations affecting their industry. The analysis of the cases comes next. 14. Analysis This supplier – customer interface works effectively (Awuah, 1997, 2001) when the parties regularly transfer elements of exchange (i.e. services, information, finance and social exchange) between themselves and also learn and adapt to each other mutually. In Table 1a and b, we show some of the similarities and differences between the two cases. With the services characteristics depicted in Table 1a, the simultaneous presence of the seller and the buyer (Berry & Parasuraman, 1991; Edvardsson & Larsson, 2004; Normann, 1991) has been very crucial. This has, among other things, enabled the service provider and the customer (in both cases) to learn how to utilize each other's capabilities. HSTD, for example, have important customers that also have advertising expertise in-house, yet they engage the services of HSTD because the latter's ‘creativity' in suggesting ideas or producing solutions are valued by most customers. Analogously, Albhins' customers, especially those with expertise in-house, buy services because that enables them to exploit the unique customized solutions (solutions that demand much time and timely knowledge), which Albhins provides them. Besides the

G.B. Awuah / Industrial Marketing Management 36 (2007) 1068–1081 Table 1 HSTD Professional services firm

Albhins Professional services firm

a: A summary of the similarities between the two cases Core services (selling ideas, advice Core services (selling ideas, advice, and design of pictures and and offering legal protection for, e.g., patent, intellectual property rights and messages) demand high customer contacts, mostly offering tailordomain name) demand high customer made services contacts, mostly offering tailor-made services Core services are intangible, can vary Core services are intangible, can vary according to who provides it and who according to who provides it and who receives it at a particular time, receives it at a particular time, production and consumption are at production and consumption are at the same time, and are perishable (can't the same time, and are perishable be stored) in most cases. These have (can't be stored) in most cases. necessitated the simultaneous These have necessitated the simultaneous presence of the seller presence of the seller and the buyer in most instances and the buyer in most instances High customer involvement: joint High customer involvement: joint need analysis and solution for need analysis and solution for the the customer customer Regular and frequent transfer of Regular and frequent transfer of elements of exchange, high elements of exchange, high rate of rate of mutual learning and mutual learning and adaptation adaptation between seller between seller and customer and customer High and regular use of external High and regular use of external actors that provide supporting services actors that provide supporting (intangibles like education, services (intangibles like education, information, consulting information, consulting and marketing research) and and marketing research) and products (printing materials and products (printing materials so on) to complement the seller's and so on) to complement the core services seller's core services Outcome: Has won and retained Outcome: Has won and retained many important customers that many important customers that give regular assignments, give regular assignments, large large purchases. Long-term purchases. Long-term contracts contracts with important customers with important customers as a as a guarantee or security for stable guarantee or security for stable exchange relationships; average age exchange relationships; average of relationship is 30 years age or relationship is 6 years b: A summary of the differences between the two cases HSTD is an advertising firm, with 8 Albhins is a legal firm, with 200 employees and an annual turnover employees and an annul turnover of of 8 million Swedish kronor 400 million Swedish kronor It is a relatively new company, It is an old company that was founded in 2003, as a merger founded in 1891 between two companies that had been in existence since 1995 and 1996 respectively Operates mostly in Sweden, with Operates in many countries, with Halmstad as headquarters headquarters in Stockholm and branches in some European countries No extended international network of Has extended international network exchange relationships of exchange relationships Close and regular interaction with, Close and regular interaction with, e.g., suppliers in order to coordinate e.g., suppliers in order to coordinate and integrate the heterogeneous and integrate the heterogeneous services to assure consistency and services to assure consistency and reliability of services to endreliability of services to endcustomers are restricted to actors in customers are carried on Sweden only. Has not experienced worldwide. Has experienced some customer defection customer defection

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immediate customer, regular interaction with several other actors in a firm's networks of exchange relationship (Awuah, 2001; Anderson & Narus, 2004; Håkansson & Snehota, 1995) enables it to gain access to others' resources and activities, which become complementary to the firm's own and thereby making it possible to meet its immediate customers' needs. In both cases, the services suppliers have close and continuous exchange relationships with other actors, this playing a tremendous role in the focal companies' performance. The ‘give and take exchange' relationships between the PSFs and all the other actors, including immediate customers, in their network (see Figs. 1 and A1) have enabled the studied firms to meet demands made on them by their customers and all the other actors they interact with in their network. This is consistent with the observation made by other researchers. “The performance and effectiveness of organizations operating in a network, by whatever criteria these are assessed, become dependent not only on how well the organization itself performs in interaction with its direct counterparts, but also on how these counterparts in turn manage their relationships with third parties” (Håkansson & Snehota, 1995, p. 191). As the customers are involved in the production and consumption (Berry & Parasuraman, 1991; Normann, 1991) of HSTD's services, their immediate feedback, and adaptation do have impact on HSTD's own learning and adaptation rate. HSTD's solutions learned from the interaction with some important customers can, with some modifications, be used to help small customer firms that do lack expertise in advertising work. HSTD's regular interaction with third parties (e.g. its own suppliers, places of learning such as universities, public seminars and trade fares) has shown that what is happening in those relationships (e.g. knowledge sharing at the universities, internal courses provided by third parties and the suppliers providing reliable and dependable services) does affect HSTD's ability to satisfy its customers, for major relationships of a company are found to be ‘inter-connected' (Håkansson & Snehota, 1995, p.12). Similarly, in Albhins' case, all customers are extensively and closely engaged in dialogue and discussions, where Albhins and the customers learn from and adapt to each other. Albhins' case also demonstrates that gaining access to Albhins' activities and resources (including those from its wider network interconnected relationships) a customer's needs' satisfaction would be facilitated (Fig. A1, Appendix C shows how embedded any of the studied firms is in a network of exchange relationships). Albhins' access to knowledge and other resources of its partners (marketing research firms and sub-attorneys in foreign markets) and interaction with universities and independent consulting firms have all contributed to Albhins' need and acquisition of better and timely knowledge or information that have helped Albhins to advice and/or to meet the needs of its customers. One important difference between the two cases, as the evidences show, is that Albhins has experienced some customer defection without some prior warnings or complaints. Oftentimes, customer defection would be about the performance of some representatives of Albhins. The characteristics of those that defect are that they have not had long-term relationships with Albhins, do not normally buy customized solutions, and are

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price-sensitive. The intense competition in the marketplace seems to influence such buyers' expectations, changing to new suppliers without any warning. But, all two cases have demonstrated that having strong customer relationships, as a services firm, is of particular importance (Berry & Parasuraman, 1991; Gummesson, 2002) because of their interpersonal focus and the relative lack of objective measures for evaluating service quality. Both HSTD and Albhins have succeeded to get many of their small firm customers, with high expectations and lack of expertise to judge quality of services obtained at the beginning of their relationships, to through mutual learning and making adaptations (e.g. in attitudes), to strive after regular, stable and long-term relationships. Irrespective of the differences in size, location, turnover and customer base, the two firms seem to act quite similarly; the use of their own capacity (own core expertise, knowledge and services) plus their use of external capacity, due to exchange relationships with third parties, have been very crucial for all of them to achieve their goals. Social interaction facilitates the rate at which the interacting parties increase their knowledge of and trust in each other (Ford, 1997; Gummesson, 2002; Huemer, 1988; Håkansson, 1982). In all two cases, some personnel in the services firms socialize with some personnel of their customers firms. For the services firms, socializing with the customer firms has produced a number of benefits, namely, it has been a way of taking care of the customers and it has also been a medium to get to know one's counterpart better, a knowledge upon which current and future businesses can be facilitated between the parties and the firms for which they work. 15. Conclusion The purpose of this study has been to systematically shed light on factors that impinge on a professional services firm's competence development over time. This study has clearly provided evidence that a services firm's ability to meet demand, its competence (Awuah, 1997, 2001), put on it by its customers (in this study), is very much affected by the firm's regular interaction with its customers and other significant actors. This is because the services firm's internal skills, activities and resources, for example, are founded to be strongly linked (Snehota, 1990) to those of all the other actors, with whom the firms interact in this study. Consistent with Dunphy et al.'s (1997) view, the firms' market-based learning and their internally focused learning reinforce each other. By the regular and effective interaction with actors in their respective network of exchange relationships, the two firms are able to draw on their complementary activities and resources so as to be able to provide reliable and consistent services to their customers. Each of the two services firms' total competence (Johnston et al., 2002; Tzokas & Saren, 2004; Fruin, 2001) is to be seen in their own internal skills, knowledge and activities plus their access to external skills, knowledge and activities of their customers, suppliers, and universities for example. Having been able to win and retained, for example, important customers that give regular and large assignments, the two firms have demonstrated their abilities to meet their respective customers' demands over time.

One important way to measure a firm's success, according to Doyle (2002; Armstong et al., 2005; Edvardsson & Larsson, 2004), is the measuring of its results in customer satisfaction. Satisfied customers, for example, are a valuable asset for a firm (Awuah, 2001; Anderson & Narus, 2004; Doyle, 2002). The important customers in this study do not only give regular assignments to their respective service providers, they engage in dialogue and mutual learning (Prahalad & Ramaswamy, 2000), undertaking mutual adaptations as well; they also recommend their respective suppliers, through positive word of mouth, to other potential customers. Each of the firms has won most customers through recommendations. In spite of some differences between the two firms (see Table 1b) they have shown that ability to meet customers' needs, a measure of their competence, produces satisfied customers that opt for longterm business relationships with the respective service providers. HSTD have customers, important ones, with whom it has had regular business relationships since 1996. Similarly, Albhins' business relationships with satisfied customers, also the important ones, have been going on for more than 30 years. In both cases, many of the important customers and their respective service providers have chosen to strength the bonds between themselves by agreeing to have written contracts, for example. As they have had regular interaction over the years, learning how to mutually use their resources and activities and undertaking mutual adaptations (Ford et al., 1986; Havila et al., 1999), the trust the parties have in each other has not only increased, they have all become increasingly committed (Hunt & Morgan, 1994; Håkansson, 1982) to the relationship that seems to pay off for each of them (Anderson & Narus, 2004). For Anderson and Narus (2004), when interacting parties mutually create value sharable among them, they are apt to continue to have relationships, as this study has shown. A number of empirical and theoretical implications can be drawn from this study; below are examples. 16. Implications of the study Since there is no coherent definition of the concept of competence and hence no standard pattern of competence development over time, various researchers have concentrated on different characteristics of the concept of competence that are in line with their view of reality (Andersson et al., 2002; Hamel & Prahalad, 1990, 1996; Johnston et al., 2002; Webster, 1991). Some have looked at, for example, a firm's core competence (Hamel & Prahalad, 1990, 1996) that will enable it to diversify its activities into two or more markets to exploit that competence. The products/services that are generated from the use of the core competences should be valued by the target customers and the core competences should be difficult to imitate by competitors. These are internal activities that need be developed or upgraded because consumers' needs change and competitors get better over time; so for the attainment of a sustainable competitive advantage, the firm needs to develop its core competences all the time. Proponents of the network view of the world (Snehota, 1990; Awuah, 2001; Johnston et al., 2002; Andersson et al., 2002) on the other hand, shift emphasis to the complementary relationships, which in turn, are the result of the interdependent

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exchange relationships between most of our firms and/or organizations, when explaining one of the main sources of a firm's competence. The present study sheds light on that too. As this study has shown, each of the firms' competence, ability to meet customer demands, is developed over time by linking together its internal skills, knowledge, and activities to those of the significant actors identified and analyzed in this study. The two firms have mostly intangible core services, the production of which demands the simultaneous presence of the buyer and the seller (Normann, 1991). The core services and most of the support services are difficult to value before purchase and can also be difficult to store. Unlike, physical products, selling professional services, with the above characteristics, will be difficult for the buyer to know what it is buying in advance; it is also difficult for the seller to demonstrate which attributes of the services and service quality will drive customer value (Edvardsson & Larsson, 2004). The two firms have shown that to be able to satisfy customers' need better than competitors can do, much time and resources should be invested in the regular interaction (regularity and frequency in relationships are emphasized by Gummesson, 2002; Håkansson & Snehota, 1995) with own customers and with others whose resources and activities complement theirs. For Anderson and Narus (2004), goods and services are created, designed and delivered by sharing knowledge and experience with others. All the cases in this study show how well the sellers of services have involved their immediate customers in the creation, design and delivery of services to them. As observed elsewhere, (Mercer, 1993, Ford, 1990) providing business services will require greater specialization and customization, where customer–supplier interaction is intense, in order for the seller to be able to meet the buyers' needs. The sellers of services in this study draw heavily, for

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example, on joint learning that occurs in interaction with third parties (Ford et al., 1986). Relationship with third parties, in any attempt to meet customers' demand, is worth the investment, for the market-based organizational learning and the internally focused learning reinforce (Dunphy et al., 1997) each other. Since customers can defect, in spite of their active involvement in production and consumption of services, as one of the cases shows, the relative lack of objectivity in measuring service quality (Berry & Parasuraman, 1991), for example, is an important issue to be addressed by a services firm. A major thought which has been followed throughout the present study relates to the extent to which a company's competence development over time can be influenced, in large, by its interaction with some significant actors in its network of exchange relationships. It has not been possible to examine all the exchange relationships in which the focal actors, Albhins and HSTD and their respective customers, might engage. Our model, with its roots in the network perspective, has served its purpose by aiding our understanding of how the PSFs through actions and interactions with some significant actors in their network describe and/or interpret the extent to which their exchange relationships with some significant others enable them to satisfy demands made on them. Some suggestions (see above) have been provided regarding how firms or researchers can address the distinctive characteristics of professional services firms when using the applied model in this study to investigate factors that impinge on a firm's competence development over time. By the study of a firm's competence development over time, future research should investigate whether other factors, other than those in our model, are possible to describe the effects of a network (s) of exchange relationships when services firms, owing to their distinctive characteristics, are involved than manufacturing firms.

Appendix A Table A1 Sample characteristics of the firms studied Company Halmstad Reklam (HSTD), operates mostly in Sweden, with Halmsatd as headquarters Was established in 2003, a merger between “The One” (established in 1995 and “Kerg Kirtley” (established in 1996) The respondent at HSTD was the Managing Director; interview on 5-10-2005

Industry

Advertising Usual approach to win customers and assignments: (a) Reactive: customers seek HSTD on their own because of recommendations, word-of-mouth. This seems to be the most important for HSTD (b) Proactive: customers and assignments are won through own active promotion Albhins AB, one of the leading firms of Legal services patent and trademark attorneys in Europe. Usual approach to win customers and assignments: Was founded in 1891, with its main (c) Reactive: customers come to headquarters in Stockholm. Has also Albhins on their own because of branches in Gothenburg, Malmö, all in recommendations, word-of-mouth. Sweden, Copenhagen, (Denmark) This seems to be the most and (Munich) Germany important for Albhins The respondent at Albhins in Gothenburg (d) Proactive: customers and was the patent manager; interview on assignments are won through 12-09-2005 own active promotion

Turnover and number of employees

Services provided

8 million Swedish kronor 8 employees

Advertising services: Printing, Internet services and sending messages and pictures via films and radio. The provision of the above services is about basically offering ideas, advice and design of pictures or images Provides services to mostly business and non-business organizations as customers. Customers are mostly in Sweden

400 million Swedish kronor Services: Providing legal protection for a 210 employees customer's patent, trademark, design, copy right, domain names and providing advice on competition regulation and commercial law in a particular market. Customers: mostly business companies, small and large. Most customers operate in Sweden and in foreign markets

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Appendix B In an attempt to develop an interactive approach to the marketing of professional services (PS), the following is provided in Ford (1997). Professional services can be distinguished from other services due to the following characteristics of PS A) B) C) D) E)

Advisory and focus on problem solving Provided by a qualified person known for a special skill Centred on assignment required by the client Provided by a professional who is independent Supervised by an association which attempts to lay down requirements of competence and to enforce a code of ethics.

Types of professional services a) b) c) d) e) d)

Financial accounting, auditing, book-keeping Advertising and other agencies and brokers Business and management consulting Engineering, architectural and interior designing Legal Medical health care

Appendix C

Fig. A1. An illustration of any of the services firm's network of exchange relationships (In reality the network will extend beyond this; this is just a delimited one). Explanation: (e.g. HSTD-Customer or Albhins-Customer Focal relationship Interaction) Focal actor's direct relationships with other actors Focal actor's indirect relationships with other organizations (e.g. Universities, Research Institutes, trade association, government agencies).

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